The effect of differentiating costs of capital by country and technology on the European energy transition

Friedemann Polzin; Mark Sanders; Bjarne Steffen; Florian Egli; Tobias S. Schmidt; Panagiotis Karkatsoulis; Panagiotis Fragkos; Leonidas Paroussos

doi:10.1007/s10584-021-03163-4

The effect of differentiating costs of capital by country and technology on the European energy transition

Friedemann Polzin^*
, Mark Sanders
, Bjarne Steffen
, Florian Egli
, Tobias S. Schmidt
, Panagiotis Karkatsoulis
, Panagiotis Fragkos
, Leonidas Paroussos

^*Corresponding author for this work

Research output: Contribution to journal › Article › Academic › peer-review

Abstract

Cost of capital is an important driver of investment decisions, including the large investments needed to execute the low-carbon energy transition. Most models, however, abstract from country or technology differences in cost of capital and use uniform assumptions. These might lead to biased results regarding the transition of certain countries towards renewables in the power mix and potentially to a sub-optimal use of public resources. In this paper, we differentiate the cost of capital per country and technology for European Union (EU) countries to more accurately reflect real-world market conditions. Using empirical data from the EU, we find significant differences in the cost of capital across countries and energy technologies. Implementing these differentiated costs of capital in an energy model, we show large implications for the technology mix, deployment, carbon emissions and electricity system costs. Cost-reducing effects stemming from financing experience are observed in all EU countries and their impact is larger in the presence of high carbon prices. In sum, we contribute to the development of energy system models with a method to differentiate the cost of capital for incumbent fossil fuel technologies as well as novel renewable technologies. The increasingly accurate projections of such models can help policymakers engineer a more effective and efficient energy transition.

Original language	English
Article number	26
Pages (from-to)	1-21
Journal	Climatic Change
Volume	167
Issue number	1-2
DOIs	https://doi.org/10.1007/s10584-021-03163-4
Publication status	Published - Jul 2021

Bibliographical note

Funding Information:
This research was conducted as part of the EU’s Horizon 2020 research and innovation programme, project INNOPATHS (grant agreement No. 730403), and project GREENFIN (European Research Council, grant agreement No 948220). As part of the INNOPATHS project, it was partly supported by the Swiss State Secretariat for Education, Research and Innovation (SERI) under contract number 16.0222. The opinions expressed and arguments employed here in do not necessarily reflect the official views of the Swiss Government. Mette Huijgens and Nielja Knecht provided excellent research assistance.

Funding Information:
This research was conducted as part of the EU?s Horizon 2020 research and innovation programme, project INNOPATHS (grant agreement No. 730403), and project GREENFIN (European Research Council, grant agreement No 948220). As part of the INNOPATHS project, it was partly supported by the Swiss State Secretariat for Education, Research and Innovation (SERI) under contract number 16.0222. The opinions expressed and arguments employed here in do not necessarily reflect the official views of the Swiss Government. Mette Huijgens and Nielja Knecht provided excellent research assistance.

Publisher Copyright:
© 2021, The Author(s).

Funding

This research was conducted as part of the EU’s Horizon 2020 research and innovation programme, project INNOPATHS (grant agreement No. 730403), and project GREENFIN (European Research Council, grant agreement No 948220). As part of the INNOPATHS project, it was partly supported by the Swiss State Secretariat for Education, Research and Innovation (SERI) under contract number 16.0222. The opinions expressed and arguments employed here in do not necessarily reflect the official views of the Swiss Government. Mette Huijgens and Nielja Knecht provided excellent research assistance. This research was conducted as part of the EU?s Horizon 2020 research and innovation programme, project INNOPATHS (grant agreement No. 730403), and project GREENFIN (European Research Council, grant agreement No 948220). As part of the INNOPATHS project, it was partly supported by the Swiss State Secretariat for Education, Research and Innovation (SERI) under contract number 16.0222. The opinions expressed and arguments employed here in do not necessarily reflect the official views of the Swiss Government. Mette Huijgens and Nielja Knecht provided excellent research assistance.

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 7 Affordable and Clean Energy

Keywords

Clean energy investments
Cost of capital
Electricity system
Weighted average cost of capital

Access to Document

10.1007/s10584-021-03163-4Licence: CC BY

Polzin2021_Article_TheEffectOfDifferentiatingCostFinal published version, 872 KBLicence: CC BY

Cite this

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title = "The effect of differentiating costs of capital by country and technology on the European energy transition",

abstract = "Cost of capital is an important driver of investment decisions, including the large investments needed to execute the low-carbon energy transition. Most models, however, abstract from country or technology differences in cost of capital and use uniform assumptions. These might lead to biased results regarding the transition of certain countries towards renewables in the power mix and potentially to a sub-optimal use of public resources. In this paper, we differentiate the cost of capital per country and technology for European Union (EU) countries to more accurately reflect real-world market conditions. Using empirical data from the EU, we find significant differences in the cost of capital across countries and energy technologies. Implementing these differentiated costs of capital in an energy model, we show large implications for the technology mix, deployment, carbon emissions and electricity system costs. Cost-reducing effects stemming from financing experience are observed in all EU countries and their impact is larger in the presence of high carbon prices. In sum, we contribute to the development of energy system models with a method to differentiate the cost of capital for incumbent fossil fuel technologies as well as novel renewable technologies. The increasingly accurate projections of such models can help policymakers engineer a more effective and efficient energy transition.",

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author = "Friedemann Polzin and Mark Sanders and Bjarne Steffen and Florian Egli and Schmidt, \{Tobias S.\} and Panagiotis Karkatsoulis and Panagiotis Fragkos and Leonidas Paroussos",

note = "Funding Information: This research was conducted as part of the EU{\textquoteright}s Horizon 2020 research and innovation programme, project INNOPATHS (grant agreement No. 730403), and project GREENFIN (European Research Council, grant agreement No 948220). As part of the INNOPATHS project, it was partly supported by the Swiss State Secretariat for Education, Research and Innovation (SERI) under contract number 16.0222. The opinions expressed and arguments employed here in do not necessarily reflect the official views of the Swiss Government. Mette Huijgens and Nielja Knecht provided excellent research assistance. Funding Information: This research was conducted as part of the EU?s Horizon 2020 research and innovation programme, project INNOPATHS (grant agreement No. 730403), and project GREENFIN (European Research Council, grant agreement No 948220). As part of the INNOPATHS project, it was partly supported by the Swiss State Secretariat for Education, Research and Innovation (SERI) under contract number 16.0222. The opinions expressed and arguments employed here in do not necessarily reflect the official views of the Swiss Government. Mette Huijgens and Nielja Knecht provided excellent research assistance. Publisher Copyright: {\textcopyright} 2021, The Author(s).",

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AU - Polzin, Friedemann

AU - Sanders, Mark

AU - Steffen, Bjarne

AU - Egli, Florian

AU - Schmidt, Tobias S.

AU - Karkatsoulis, Panagiotis

AU - Fragkos, Panagiotis

AU - Paroussos, Leonidas

N1 - Funding Information: This research was conducted as part of the EU’s Horizon 2020 research and innovation programme, project INNOPATHS (grant agreement No. 730403), and project GREENFIN (European Research Council, grant agreement No 948220). As part of the INNOPATHS project, it was partly supported by the Swiss State Secretariat for Education, Research and Innovation (SERI) under contract number 16.0222. The opinions expressed and arguments employed here in do not necessarily reflect the official views of the Swiss Government. Mette Huijgens and Nielja Knecht provided excellent research assistance. Funding Information: This research was conducted as part of the EU?s Horizon 2020 research and innovation programme, project INNOPATHS (grant agreement No. 730403), and project GREENFIN (European Research Council, grant agreement No 948220). As part of the INNOPATHS project, it was partly supported by the Swiss State Secretariat for Education, Research and Innovation (SERI) under contract number 16.0222. The opinions expressed and arguments employed here in do not necessarily reflect the official views of the Swiss Government. Mette Huijgens and Nielja Knecht provided excellent research assistance. Publisher Copyright: © 2021, The Author(s).

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N2 - Cost of capital is an important driver of investment decisions, including the large investments needed to execute the low-carbon energy transition. Most models, however, abstract from country or technology differences in cost of capital and use uniform assumptions. These might lead to biased results regarding the transition of certain countries towards renewables in the power mix and potentially to a sub-optimal use of public resources. In this paper, we differentiate the cost of capital per country and technology for European Union (EU) countries to more accurately reflect real-world market conditions. Using empirical data from the EU, we find significant differences in the cost of capital across countries and energy technologies. Implementing these differentiated costs of capital in an energy model, we show large implications for the technology mix, deployment, carbon emissions and electricity system costs. Cost-reducing effects stemming from financing experience are observed in all EU countries and their impact is larger in the presence of high carbon prices. In sum, we contribute to the development of energy system models with a method to differentiate the cost of capital for incumbent fossil fuel technologies as well as novel renewable technologies. The increasingly accurate projections of such models can help policymakers engineer a more effective and efficient energy transition.

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KW - Cost of capital

KW - Electricity system

KW - Weighted average cost of capital

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The effect of differentiating costs of capital by country and technology on the European energy transition

Abstract

Bibliographical note

Funding

UN SDGs

Keywords

Access to Document

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